Builder Confidence Soars – Don’t Believe the Hype

The National Association of Home Builders (NAHB) today reported its Housing Market Index (HMI) for the month of June, and it marked an important shift. For the first time since falling under the break-even mark of 50.0 at the start of the real estate collapse, the HMI rose back above it today. However, a closer look at the data shows it remains suspect and unreliable as a forecasting tool.

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Builder Confidence

The HMI surged 8 points, rising to a mark of 52 for June. The last time it rose that much was in 2002, so this is strange to begin with. It’s the first time the index sat above breakeven since April 2006. Each of the three components of the index increased, though take note of the much lower level of the index measuring actual prospective buyer traffic. I view both the other two metrics as being speculative in nature or prospective, but the “prospective buyer traffic” figure actually accounts for what builders are really seeing in terms of activity. The current sales conditions index is measuring sentiment about “conditions,” not sales.

	June Level	June Change
Housing Market Index	52	+8
Current Sales Conditions	56	+8
Expectations Index	61	+9
Prospective Buyer Traffic	40	+7

Regionally speaking, the component indexes seem to say builders are buyers into the “grass is greener” philosophy. Because, when measuring their own operating regions, it seems they’re not seeing the best of circumstances. Otherwise, explain why each regional index sits under 50 while the national measure is above it.

	June Level	June Change
Northeast	37	+1
Midwest	47	+3
South	46	+4
West	48	-1

Builder confidence gained on what the NAHB chairman said was a lack of inventory in the existing home market. That’s a positive way to look at it from a biased industry viewpoint, but I see something else catalyzing the sudden surge. Builders are just coming out of the spring selling season, where business is generally better than the rest of the year. Also, they’ve likely seen some buyers pushed into action on the sudden surge in mortgage rates recently. However, I disagree, as I do not see that happening based on the real mortgage activity data; in fact I see the opposite occurring. Last week’s increase in mortgage activity was a flawed data point in my opinion. Anyway, activity driven by rising rates would be from the buyers on the fence, of which the number is limited. So such a surge would not be sustainable, and would not be driven by underlying economic catalyst, but instead by fear of missing the opportunity.

Housing stocks surged today on the news, but I do not see a good enough reason for it here.

Housing Security	6/17/13 thru Noon	52-Weeks
SPDR S&P Homebuilders (NYSE: XHB)	+1.9%	+55%
iShares Dow US Real Estate (NYSE: IYR)	+0.1%	+9%
PulteGroup (NYSE: PHM)	+3.6%	+140%
K.B. Home (NYSE: KBH)	+3.2%	+180%
D.R. Horton (NYSE: DHI)	+2.6%	+54%
Toll Brothers (NYSE: TOL)	+3.8%	+35%
Hovnanian (NYSE: HOV)	+2.6%	+158%
Beazer Homes (NYSE: BZH)	+2.7%	+53%
Lennar (NYSE: LEN)	+1.7%	+53%

Let’s not forget that the index is only at about breakeven, and that the perspectives of a large number of smaller builders surveyed is keeping it down. It’s the larger builders, who have gained market share on the failures of the smaller players, who have benefited most from the crisis shakeout. That is behind their numbers as much as anything else, because the general levels of activity, while improving, is not all that great yet. In any event, these stocks have had a great run, but they are probably extended and still vulnerable here.

The economy is slipping currently, in my view, and mortgage rates are moving in the wrong direction too quickly. This week, the Fed had better fix the mess it created in mid-May, or mortgage rates will continue rising and potentially derail the real estate recovery.

In conclusion, there is enough suspect data in the HMI to question the message that is being received by housing stocks today. With the Fed meeting being the obvious determining factor this week, I’m not buying housing stocks on this news, and recommend investors wait a few days before placing bets. We need the Fed to cut its economic forecast and hedge on its recent hawkish commentary, so mortgage rates will back up and the real estate recovery will be secured.

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